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The Week Ahead in FX Markets – Trade Agreement | “Get Brexit Done” | NZ GDP Preview

Published December 16, 2019

By Phil Lynch

It has been a busy old week in FX markets with two major developments in areas that have been an ongoing concern for global markets. Perhaps the most important news is that the U.S. & China have reached a “Phase One” agreement on trade. Meanwhile PM Boris Johnson is eyeing an exit from the EU by the 31st of January.

This week is also jam packed with tier one economic announcements from around the world. The highlight for the kiwi will be our 3rd quarter GDP numbers, which are released on Thursday morning at 10:45 AM. With all the economic data out this week, and the nature of markets at this time of year, we may be in for another rocky week.

U.S. & China Trade Agreement – Phase One

On Friday a “Phase One” agreement was reached between the U.S. & China that reduces some U.S. tariffs in exchange for Chinese purchases of U.S. products of at least USD 200 billion (about the size of New Zealand’s entire economic output in a year). In return, the tariffs that were expected to come into effect today have been suspended whilst others will be reduced. The 86-page agreement is due to be signed the first week of January.

U.S. Trade Representative Robert Lighthizer called Friday the “most momentous day in trade history” because of the China deal which came alongside a revised U.S.-Mexico-Canada Agreement. The two trade deals cover $2 trillion in overall trade. Markets have reacted favourably to the news with most major indices heading higher.

“Get Brexit Done”

British Prime Minister Boris Johnson has sailed back into power with a huge 80 seat majority and vowed to “get Brexit done” by the 31st of January. The Conservatives will now vote on the Withdrawal Agreement Bill and make sure it passes before the end of January. The next step will be to put together a trade deal with the EU, which Minister Gove has said could be done by the end of 2020.

The EU’s Chief Negotiator, Michel Barnier is not so confident that a trade deal can be easily reached. Last month he warned that negotiations will be “difficult and demanding” and that the EU will not tolerate unfair competitive advantage.

Markets had already priced in the chances of a Conservative win, and the NZD/GBP continues to trade near 2.5-year lows as a result. The test will now be how smoothly Boris can push through legislation to formally take Britain out of the EU.

The Week Ahead – NZ Gross Domestic Product

This week is stacked with tier one economic data, but the main event for the kiwi will be Thursday’s GDP numbers. The lagging indicator will show Q3 growth numbers, but these are expected to show positive signs. Markets are expecting quarterly growth of 0.5%, with the year on year number to jump to 2.3%. This would be up from 2.1% in Q2 and follows on from some strong economic data recently.

Notably, the RBNZ expects our GDP to grow at just 0.3% in Q3 (or at least they did when they published their last Monetary Policy Statement on 13 November). If the actual number does come in at 0.5% as markets currently expect, this will force the RBNZ to back away even further from the dovish bias they have maintained for much of 2019.

The Week Ahead – Back to Data

With major developments in the trade war and Brexit occurring last week, markets will now re-focus attention on economic data. Outside of New Zealand’s GDP, other key announcements to watch will include:

  • Australian Unemployment – expected to come in at an uncomfortably high (for the RBA) 5.3%
  • U.S. GDP– expected to show signs of stability at 2.1% year on year growth
  • U.S. Consumption– expected to show modest improvement at 0.4% month on month growth

Chart of the Day – NZD/USD

Previous performance is not a reliable indicator of future performance. However, for those importers that have been preparing quotes and budgeting over the last several months the NZD/USD may present an opportunity to secure those rates or better.

One such way of measuring performance is to compare the current spot rate to a moving average rate over the last two-months. The chart below shows the NZD/USD exchange rate is more than 3% above the 60-day simple moving average – something some people will use as an indication of value. Click on the chart to enlarge.

 

 

 

 

Rees Logan, Adam Nikitins and Stewart McCallum were appointed Joint and Several Voluntary Administrators of EncoreFX (NZ) Limited on 30 March 2020. Adam Nikitins and Stewart McCallum were appointed Joint and Several Voluntary Administrators of EncoreFX (Australia) Pty Ltd on 30 March 2020. Any queries regarding the Administrations should be directed to restructuring@nz.ey.com.